Why oil prices are so high

Filed in Gather Politics News Channel by on April 24, 2007 0 Comments

The U.S oil companies aren't to blame. Sure they're taking large profits. But they're just providing a service. People like to blame the oil companies because they're an easy target. The real reason is a massive increase in (1) global oil demand (especially from China and India), (2) the nationalization of many oil companies overseas, and (3)international instability.

The world economy is growing at a breakneck pace. China is now the 2nd largest car consumer, and is growing at a rapid pace. This is also true in many other countries. The supply was adequate when the U.S was the only major oil consumer, but now there are many other countries that want oil. This is true of other commodities, like steel (Exxon Mobile stock is up 23.26%, U.S steel stock is up 38% in the same time), copper, gold, etc.

The U.S multinational oil companies are actually very small. If I remember correctly, Exxon was the only non-state-owned oil companies in the top 10 oil companies in terms of reserves. State oil companies own 80% of the world's reserves and 2/3s of the world's production. Tight supply has allowed the large state oil companies to gain even more pricing power. State oil companies are also notoriously inefficient and corrupt. For example, in Petroleos de Venezuela (Venezuelan oil company) since becoming state owned has hardly been able to keep production up while costs have skyrocketed, and the drop in investment will hurt their future ability to produce. The same thing is happening in Mexico and Iran, where production is either falling or just barely hanging on. Politicians aren't interested in investing in production capacity, they're more than happy to use the companies as piggy banks at the expense of the long term performance.

Also, there has been a lot of instability in many parts of the world. This both decreases production in many areas plus puts a price premium due to supply shocks. In Nigeria, 20-25% of their production capacity has been cut due to fighting (mostly because the government embezzles something like 85% of the oil revenue, and the people are pissed off (understandably)). In Iraq, the oil production still hasn't reached prewar levels. Terrorism has kept oil traders on edge. Potential trouble with Iran has also kept them on edge. Nigeria has kept them on edge. These risks put a premium on the price of crude. Gasoline prices also increase every time a refinery blows up.

People always like to blame the U.S oil companies (particularly Exxon), but they aren't responsible for the high oil prices. There are many reasons, but the U.S multinational oil companies have little influence on the price (if any). Cutting U.S consumption would help lower the price, but it won't have that much of an impact any time soon. But, people will continue to point fingers. But, hopefully some people will know the facts.

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